The Expert view: Digitising business – transforming business models from products to services

18 June 2018
| Author: Shane Richmond

The digital transformation journey is underway across sectors, as companies shift business models away from products and towards services, to make better use of their data and adapt to a world that is innovating ever more rapidly. But what is driving digital transformation? And what is holding it back? Jamie Longmuir, of Gemalto, posed those questions during his introduction to a Business Reporter Breakfast Briefing for top executives from a range of sectors at The Ritz hotel in London.

Customers are a major driver of change. Today’s customer expectations are set by Amazon and Google, noted one attendee, from a global B2B software firm. And that puts pressure on B2B firms to match those service levels. In that environment, as customers digitally transform their own businesses, they put pressure on suppliers to do the same.

That means companies looking for suppliers to move to a service model, or charge on a subscription basis, as they begin to move costs from cap-ex to op-ex. The knock-on effect of this shift moves through the supply chain.

Another driver is the emergence of new competitors, without legacy business models to support, who can challenge industries. An attendee from a healthcare device manufacturer said that she encouraged business units to work with these new disruptors, rather than compete against them. This could mean, for example, ensuring your device supports a range of software and applications, rather than attempting to create a ‘walled garden’ that forces customers to use only your services.

An attendee from a consumer electronics manufacturer said the pace of transformation was increasing much more quickly than expected. This was a driver for change but raised the problem of how to ensure that everyone within the business can transform at that speed.

Obstacles to change

Previous Business Reporter breakfast briefings about digital transformation tended to be dominated by discussion of how to initiate change. In this case, it seemed that everyone had begun the process of change but the preoccupation was with the obstacles preventing this change from moving more quickly or achieving certain goals.

Often the problem is a lack of infrastructure. As one attendee put it: if Amazon changes its prices algorithmically every 15 minutes, how can we expect customers to buy from us when we’re tracking prices on a spreadsheet?

Some of this, attendees agreed, comes down to fear of change. The “server huggers” in IT, said one delegate, are reluctant to move to the cloud because they feel like they will lose ownership of their part of the business, for example.

However, one attendee argued that it is not so much fear of change as the knock-on effects that can slow down transformation. For example, shifting a business model from selling products to selling services changes the incentives for sales staff. Unless these changes are considered, sales staff could find themselves fearing a reduction in bonuses or greater difficulty in reaching targets, and they may respond by resisting change.

Another unexpected obstacle from shifting to a software-as-a-service (SAAS) model, one delegate noted, is that customers themselves might not be ready for it. She said that one customer had complained about monthly upgrades to the SAAS version of the service because they were not equipped to deal with them. It also brings with it the need for licencing, which can be an added complication for the unprepared.

Pushing change forwards

The ‘frozen middle’ of the organisation is necessary while the company transforms. Without it, legacy functions and processes will fail. Navigating changes to a legacy system can be fraught with disincentives: you’re unlikely to be fired for leaving a legacy system alone, even if it goes wrong, but nobody wants to risk being the person who changes a legacy system, in case it backfires. However, as the business reaches the tipping point of transformation, the ‘frozen middle’ starts to become a blocker. Attendees suggested several ways to ‘thaw’ it.

The obvious key is leadership. Having sign-up for change throughout the organisation, but particularly at board and executive level, is essential if staff are to embrace it. On a day-to-day level, the project must be owned by someone who can convince each department of the need for change, while emphasising that the project is supported from the top.

Increasingly, attendees said, they are seeing enterprise architects brought in from outside to lead change efforts. While digital transformation was once seen as the province of IT, this had changed as the IT department had mixed success in achieving change. Instead, lots of businesses had turned to outside help. Online resources, such as LinkedIn were praised as a source of advice and support.

Similarly, said one attendee, vendors can be enormously useful allies when it comes to advising on changing process. They have experienced the same challenges at numerous other organisations and often have strategies for helping to smooth the path.

Changing business models bring with them a need to be aware of new metrics. User experience becomes more important, for example, and some attendees said that their organisation is still grappling with these measures. Most businesses remain more comfortable with traditional KPIS; the business model might change but the business still exists to win customers and produce profit.